Rich North, hungry South

Fears that growth in the developing countries will jeopardise the rich world's prosperity are ill-founded and dangerous
A few years ago, the rich world's worry about economic interaction with developing countries was that the poor could not profit from it. So unbalanced were the terms of exchange between the North's mighty industries and the South's weakling sweatshops that trade between the two could be nothing more than exploitation of the one by the other: far from helping the poor countries, global integration would actually deepen their poverty. This fear has now given way to a pessimism that is equal (ie, equally apocalyptic) and opposite - namely, that trade with the developing world will impoverish today's rich countries.

Like the previous scare, this view contains an iota of truth - enough to lend plausibility. Also like its predecessor, it is an hysterical exaggeration. However, this new fear is more dangerous than the old one. The earlier scare tacitly affirmed that the industrial countries would suffer if they cut their links with the third world. Starting from there, campaigning in the North to restrict trade with developing countries was going to be an uphill struggle. Those who oppose deeper economic integration now have a better platform. Vital interests oblige the rich countries to protect their industries from the new onslaught. Unlike its predecessor, this idea may sell.

Fallacies and travesties

The grip that this thinking already has on popular opinion owes little to economic history or principles. The new fear, like the old one, expresses the conviction that growth in one part of the world must somehow come at the expense of another. This is a deeply rooted prejudice, and plainly wrong. Very nearly all of the world is more prosperous now than it was 30 years ago. Growth has been a story of mutual advance, not redistribution; and where living standards have not improved in recent decades (notably, in parts of Africa), excessive integration in the international economy has not been the cause.

Lending useful support to this first error is a second - the idea that there is only so much work to go round. If new technologies render some jobs obsolete, or if an increase in the supply of cheap imports makes other jobs uneconomic, the result must be a permanent rise in unemployment. Again, on a moment's reflection, this is wrong: otherwise, technological progress this century would have pushed unemployment rates in the industrial countries to something in excess of 95%.

At the core of both fallacies (and their many variants) is a blindness to the adaptive power of a market economy. When today's rich economies were predominantly agricultural, it seemed certain that rapidly rising farm productivity (thanks to new technology) would create a permanent army of unemployed. In the days of labour-intensive manufacturing, the same fears were expressed about labour-saving technology in the factory. Farm employment in the industrial countries has dwindled to nearly nothing; manufacturing employment in America now stands at a mere 15% of the labour-force. But other jobs have taken their place. As a result, these changes have happened alongside - indeed, they have been part and parcel of - an extraordinarily rapid, persistent and widely shared improvement in living standards.

Yet it does not suffice to refute elementary fallacies. Sophisticated alarmists avoid them (taking care, obviously, not to educate their listeners). Put carefully, their case goes as follows. The breadth and intensity of third-world competition is increasing. The pressure is concentrated on particular parts of the economy - for the moment, on low-skill manufacturing. Wages there are being forced down and jobs lost. This change will accelerate. Modern societies (with weak ties of family and religion) are no longer equipped to withstand such strains. The result will be great social distress - and possibly breakdown.

This argument rests on a series of claims that need to be examined one by one. Our survey after page 84 does this at length. It agrees that in many industries the developing countries are offering much stiffer competition than before, and that this will continue. It also agrees that the wages and jobs of low-skilled (and some other) workers are under pressure as a result. But it argues, first, that these effects have been overdone. Third-world incomes are automatically regulated by international differences in productivity: the faster the poor countries succeed in raising their productivity, the faster their advantage in cheap labour will be eroded. Moreover, that advantage has itself been exaggerated. Labour costs are only a small part of total costs, especially in manufacturing; in other respects - in complementary physical and human capital - the poor countries will remain at a big disadvantage for years.

So the pressures have been overstated. On the other hand, what the industrial countries stand to gain from faster growth in the third world has been altogether ignored. Stronger competition will push rich-country producers to invest more and improve their efficiency; expanding markets for rich-country exports will allow them to reap new economies of scale. Even more important is the direct effect that greater productivity in the third world will have on the North's standard of living. Cheaper imports mean lower prices and, hence, higher real incomes. The potential gain is large.

In the aggregate, the economic benefits to the North from faster growth in the third world seem certain to outweigh the costs. Remember the gains to the world's poor countries (which few of the doomsayers even pause to mention), and the global benefit is immense. And yet, you might ask, what consolation is this to the rich countries' losers? Perhaps the social costs for the North are so great that the economic gain should be refused.

Suppose this is right. It would follow that new technology ought to be resisted with even greater urgency than imports from the third world. Technological progress, after all, is an even more powerful engine of economic change. It asks the citizens of rich countries to strike the same bargain they are offered by faster growth in the developing world: in the aggregate, it benefits them, but there are losers along the way. Ross Perot, Sir James Goldsmith and the other leading alarmists on third-world growth have not yet argued for prohibitive taxes on all forms of labour-saving innovation. This can only be an oversight. Innovation remains the greater threat to social harmony - and believing this requires no forward leap of the imagination. Machines have been destroying jobs, wrecking communities and spreading misery for centuries.

Doubtless, some argue seriously for a punitive innovation-tax. Most people would regard the idea as absurd. Why? Not because new technology brings nothing but good (the social costs are real) but because, with time, the benefits overwhelm the costs. So it will prove with trade with the developing world.

As in accommodating the changes wrought by new technology, however, governments have an important job - to protect the losers without denying the benefits to citizens at large. This is a crucial point: if the case against trade with the third world gains ground, it will be partly because governments fail in that challenge. It will not do to provide a welfare system that pays a subsistence income to those whose jobs disappear, for boredom and idleness, even at a bearable standard of living, are socially corrosive. Far more needs to be done to help workers acquire the skills they need to switch jobs - and, in many cases, to equip them with the literacy and numeracy that they may well have lacked in the first place. Steadily expanding programmes of adult education, better job-placement services, grants and other help for those who need to move house to find work, and explicit subsidies for some kinds of low-wage employment would all be sensible ways to spend part of the dividend that growth in the South will pay to the North.

This is an agenda that governments have been too slow to develop. Unless they start to act soon, the alarmists may win more converts, and the marvellous opportunity that is now before the world may be jeopardised. To build obstacles on the developing countries' path out of poverty would be the crime of the century. Happily, it is preventable.

The Economist, October 1, 1994